Authors: Roberta Capogrosso, Giulia David, Giulia De Aloysio, Luca Laghi, Roberto Malvezzi, Eraldo Menconi, Marco Padula, Francesca Pecchia, Francesca Picenni, José Manuel Salmeròn Lissén, Paolo Luigi Scala

 

Question 1. Why do we need a financial solution that is tailored for the Mediterranean area?

The deep retrofitting market is experiencing difficulties throughout Europe, but the Mediterranean area is characterized by specific challenges, due to environmental and climatic issues, to the structure of ownership and of the building stock, or to peculiar cultural, social and economic conditions, and also to the very structure of the renovation market.

 

The main shared issues and barriers that arise in this complex framework are listed in the following table:

 

Coupled heating and cooling demand	ENVIRONMENTAL ISSUES
Rapid increase of the cooling demand
Lack of dedicated technical and financial solutions	TECHNICAL ISSUES
Lack of a large successful case-studies history
Fragmented and often under-qualified renovation supply chain	MARKET ISSUES
Low level of trust towards market operators
Lower income and guarantees for the younger generations	ECONOMIC ISSUES
Higher impact of the economic crisis and of the pandemic
Difficult access to financial instruments	FINANCIAL ISSUES
Low propensity to pursue long-term investments
High percentage of private ownership	OWNERSHIP ISSUES
Difficult decision-making in multi-family housing
Higher ratio of old or outdated buildings	REAL ESTATE ISSUES
Lack of awareness about the increase of real estate value due to EE
Lower cultural attitude towards energy efficiency	CULTURAL ISSUES
Individualistic and do-by-yourself tendencies

 

Given this framework, it is necessary to set up a strategy that goes beyond the mere physical needs of the buildings and the technological aspects, so as to integrate social, entrepreneurial, financial, technical, regulative and environmental aspects  as means to deal successfully with the complexity of the Mediterranean living spheres and the behaviours of their communities.

 

To this purpose, the H2020 HAPPEN project¹ pursues the development and activation of a new approach, named MedZEB, tailored to the deep retrofitting of the residential built environment of the Med space².

 

The MedZEB approach drafts a Mediterranean way to deep retrofitting by leveraging on the following features:

• Holistic: it is aimed at integrating the most relevant aspects of the retrofitting supply chain (e.g. technical, financial, procedural, entrepreneurial, social, etc.);
• Transparent: it is aimed at putting on the market novel tools for increasing the quality of the retrofit process and for enhancing investors’ trust (e.g. the MedZEB Protocol);
• Adaptive: it is aimed at enhancing soft added values of the retrofitting, such as flexibility guaranteed by a step-by-step approach, comfort and well-being, smart monitoring, etc.

The MedZEB approach was developed by capitalizing a large background of available knowledge and state-of-art solutions, building on them in order to develop new solutions aimed at overcoming the main obstacles to the market uptake of deep retrofitting in the Med zone.

 

In this framework, the MedZEB Protocol has been developed in order to strenghten the transparency of the MedZEB Approach, defragment the retrofitting value chain and foster investments in building renovation.

 

The MedZEB Protocol is a guarantee that the retrofitting process will be carried out properly along the whole retrofitting value chain. The Protocol is a document signed by all the actors involved in the renovation project and contains the quality requirements to access the financial solution designed within HAPPEN.

 

Only subjects who have undergone proper training in the MedZEB approach will be allowed to join the Protocol.

 

Question 2: What is the "Versatile Energy Loan" solution and how is it integrated within the holistic framework of the MedZEB approach?

The innovative financial solution developed in the framework of the HAPPEN Project is called Versatile Energy Loan (VEL) and consists in the contractual definition of a cumulative mortgage at year zero entailing multiple disbursement steps through time.

 

This solution was conceived in order to be fully integrated with recent evolutions in the renovation market, such as the Individual Building Renovation Passport (IBRP), defined as “a document outlining a long-term (up to 10 or 20 years) step-by-step renovation roadmap for a specific building, which proposes to articulate the retrofitting process into multiple steps.”³

 

General structure of the Versatile Energy Loan in the case of a three steps retrofit

 

The design of the VEL financial solution allows for an increased sustainability and overall reduction of the total initial investment necessary, thanks to the structural exploitation of the energy savings as financial leverage for funding the interventions.

 

Moreover, this model entails that the mortgage issued at year 0 is proportional only to the first amount of the disbursement, thus reducing the overall financial burden on the households.

 

The figure shows the general structure of the solution, in the case of a three-steps renovation. While the renovation is carried out, for instance in 15 years, according to the IBRP model, the reimbursement is completed in 30 years; in this simulation, 50% of the total investment is concentrated in the first step, and therefore, the mortgage is registered on the 50% of the total investment.

 

The solution requires that the second renovation step begins once the progressive reimbursement of the first step meets the constraint for which the cumulative investment of step 2 and the remaining step 1 is nearly around the initial mortgage issued. Similarly, this yields for the step 3, which can be initialized e.g. once the reimbursement of step 1 has been fully completed.

 

In order to reach this result, the VEL solution is deeply integrated with the holistic environment of the MedZEB approach, in which a large set of cost-optimal packages of technical solutions has been developed, tailored for the Med climates and buildings, which can be implemented in one-time process or following a step-by-step approach.

 

The integration of cost-optimal, step-by-step technical and financial solutions made it possible to lay the ground for a self-repayment mechanism which would allow to cover the retrofitting costs by relying on the savings achieved after each intervention step. This mechanism presents two advantages: on one hand, it improves the ability of the debtor to repay thanks to the savings achieved through energy efficiency, and on the other hand, it better protects the credit institution thanks to a stronger guarantee that the debt will be sustainable.

 

Furthermore, VEL proposes to activate a higher-level guarantee provided by a European institution (such as the EIB) aimed at applying a fixed interest rate to the whole sequence of multiple disbursement steps through the duration of the amortization plan, thus securing the possibility of benefiting from the current favourable conditions of financial markets in the long term.

 

Question 3: Has the VEL solution already been applied to real case studies?

The VEL financial solution can be applied to real building retrofitting cases on the basis of the technical Packages of Optimal Solutions (POS) developed by HAPPEN, according to three different levels of definition:

 

• Pre-calculated POS (feasibility study), extracted from the solutions database produced by HAPPEN based on standard climates, costs and reference buildings;
• Customized POS (preliminary design), based on an array of adjustments made available to the designer (e.g. local costs of technical measures, etc.);
• Tailored POS, to be achieved in the final renovation design (e.g. through a model of the actual building).

The VEL solution is now under testing in a set of case studies from the pilot sites activated by HAPPEN across all the partner countries (Italy, France, Spain, Greece, Croatia, Slovenia and Cyprus); in these sites, Living Labs have been launched and one or more case-study buildings have been selected covering a wide range of situations related to the residential sector. Up to now, the VEL solution has been applied to two case-studies:

 

1. Milan pilot building: customized level⁴;
2. Castellón de la Plana pilot building (Valencia): tailored level.

The Milan pilot building is a multifamily building corresponding to the HAPPEN reference building typology “Italy 1980-2000”, and with .ca 1.200 m² of useful surface; the calculation was carried out by assuming a climate zoning corresponding to the “W2S2 HAPPEN climate scale” on the basis of the winter and summer climate severity indexes⁵; prices for the renovation measures were evaluated by using the detailed Milano Municipality building price-list for public works 2019 (what makes this a “customized solution”).

 

The solution was divided into 3 steps, with a first step no higher than the half of the total investment, and with the following technical characteristics:

 

• Step one: outdoor façades, windows and thermal bridges;
• Step two: roof, controlled mechanical ventilation system CMVS and shading elements;
• Step three: condensing gas boiler and DHWS (50% RES).

As a final result, primary energy consumption (PEC) was reduced from the initial value of 187,7 kWh/m² to 64,4 kWh/m², which implies a cumulative reduction of 66% meeting the “deep retrofitting” standard (>60%).

 

The reduction in the life cycle cost is from 806,9 €/m² to 304,1 €/m² of useful surface. The VEL solution was then applied to this  step-by-step technical solution, by employing an interest rate of 3%, and assuming an efficiency decrease in the installation/envelope system aimed a testing the robustness of the financial solution in heavy stress conditions. Incentives provided by the 2019 Italian regulation were also considered⁶, but only for the first step, so as to cope with uncertainties linked to their availability in the future. The results of the VEL simulation are the following:

Renovation Step	Step cost [€]	Reimbursement plan	Yearly savings [€]	upgraded PEC [kWh/m2y]	step PEC reduction [%]
1	132.997	11 years	8.924	146,2	22
2	84.741	7 years from the 8th year of the 1st step	14.226	82,36	44
3	50.098	7 years from the reimbursement of the 1st step.	3.904	64,4	22

A simulation of the Versatile Energy Loan in the Milan pilot

 

The plan is fully sustainable in 18 years, with wide margin of guarantee. According to this simulation, the target of covering 100% of the energy renovation costs with the savings achieved seems fully achieved, also thanks to the additional financial bonuses available on a national scale. A further testing in case of no incentives was also performed, in order to test the VEL financial solution also with respect to other EU countries without incentivizing schemes. The plan proved to be fully sustainable in 27 years, with the following reimbursement plan:

• step 1 lasting 22 years
• step 2 lasting 10 years (from the 10^th year of the 1st step),
• step 3 lasting 7 years (from the end of the 2^nd step).

A similar test (no incentives) was carried out also in the case of single-stage intervention, resulting in an initial investment equal to 267.836€, corresponding to 223.2€/m², and leading to a plan fully sustainable in 15 years.

 

The Castellón pilot is a multifamily building with .ca 3.600 m² of useful surface, for which a dedicated model was implemented (what makes this a “tailored solution”); the calculation was carried out by assuming a climate zoning corresponding to the “W1S2 HAPPEN climate scale”, and the prices for the renovation measures were evaluated according to actual local prices.

 

The solution was divided into 3 steps, with a first step no higher than the half of the total investment, and with the following characteristics:

• Step 1: improvement of outdoor façades, windows and thermal bridges and air tightness
• Step 2: improvement of roof, night ventilation and slabs
• Step 3: installation of and aerothermal system

As a final result, primary energy consumption (PEC) was reduced from the initial value of 86,02 kWh/m² to 36,79 kWh/m², which implies a final reduction of nearly 57%. The VEL simulation was based on an interest rate of 3% and without incentives.

 

The starting data and results of the simulation are the following:

 

Renovation Step	Total Cost [€]	Reimbursement Plan	Yearly savings [€]	Upgraded PEC [kWh/m2y]	By steps PEC reduction [%]
1	205.583	in 11 years	25.218	58,12	32
2	147.069	in 11 years from the 8th year of the 1st step.	18.321	44,71	23
3	67.314	in 3 years from the reimbursement of the 1st step.	7.827	36,79	18

A simulation of the Versatile Energy Loan in the Castellón pilot

 

The plan is fully sustainable in 19 years. Calculations were also carried out considering only one step, with an initial investment equal to 437.036€, corresponding to .ca 121,4 €/m², and a reimbursement in 12 years.

 

The testing of the VEL will be extended to all the pilot sites, by developing integrated technical and financial solutions at a customized level. In the second phase of the project, an assessment will be also carried out related to the eventual extra costs emerged during the design finalization, contracting phase and construction works in the different pilot sites, respect to the calculated costs; such an assessment will allow a pragmatic and full calibration of the model.

 

At this project stage it can already be highlighted how the development of a step-by-step renovation strategy may show relevant advantages for two kinds of target groups, respect to the traditional “all-in-one-step” approach:

• private households with mid-to-low financial capacity, willing not to invest all their savings in a large renovation effort, or to be burdened by heavy loans and mortgages; this includes also small owners of a condominium, where decision making is heavily affected by the difficulty of affording high joint expenditures;
• public agencies (e.g social housing companies) willing to dilute their investments in the sustainable management of their built stock, rather than to commit in major renovation works of highly downgraded buildings.

Question 4: How will the VEL solution concretely support households from the Mediterranean area in undertaking deep retrofitting projects?

Eurostat shows how in the EU Med countries a great deal of households’ wealth is stored in the private property of real estate, with a distribution of financial capacity mostly concentrated inside elderly population groups, less keen to undergo long-term investments, while younger groups are burdened by a high ratio of mortgages/loans.

 

On this basis it can be assumed that many households are not in the conditions to individually sustain the financial cost of a deep retrofitting intervention; the VEL was conceived mostly for this target group, with the aim of providing building owners with the most adaptive financial plan for individual needs and conditions.

 

Moreover, considering the long-term duration of staged deep retrofitting plans (estimated up to 20 years, with  a payback duration up to 30 years), building owners need to have the freedom of changing their plans in such a timeframe, for instance because of a change of the building property (e.g. due to sale or succession), of technological developments in energy production or construction materials, of a fluctuation of energy supply costs: these are just some of the eventualities that might jeopardize the positive decision making in front of a long-term financing and intervention plan.

 

This is the reason why the VEL pursues maximum flexibility as of its main guiding principle, with special reference to:

• opting at the beginning for all the steps or part of them, once guaranteed that the Building Renovation Roadmap will include the whole pathway up to the deep renovation standard;
• deciding to privately fund some of the steps, both in the initial financial layout or also in the course of the disbursement, as well as decide to extinguish the loan earlier than planned without additional fees;
• assessing whether or not to proceed with the completion of the planned interventions, opting out of the retrofitting at any step;
• updating the Renovation Roadmap based on supervening technical or financial innovations (e.g. better materials at lower costs, higher incentives, etc.);

This freedom will not invalidate the right of the credit institution to claim the full reimbursement of the outstanding debt according to the agreed terms.

 

Question 5: How does HAPPEN intend to capitalize and exploit this financial solution for the future?

The second part of the HAPPEN project implementation will be strongly devoted to create the proper conditions for an effective market exploitation of the main project outputs, such as the VEL solution. This is being done by launching, in each of the HAPPEN pilot sites, the project “incubation phase”, in which the actors of the renovation supply chains engaged during the project implementation (from building owners to solutions providers, managers and building companies) will be further engaged in two relevant activities regarding the project exploitable outputs:

• beta testing of the project output aimed at gathering relevant feedback about their market potential;
• business model workshops aimed at drafting a concrete go-to-market strategy.

In this framework, the HAPPEN consortium is taking exploratory contacts with relevant financial institutions, active especially in the Med zone, so to scout their availability to participate to both the above lines of actions with reference to the VEL solution the project’s financial perspectives.

 

To this regard, if any reader is interested to take part to the beta-testing or business modeling actions on the VEL, please contact the HAPPEN coordinator at: padula@itc.cnr.it

 

On the other hand, HAPPEN is implementing an ICT platform which will allow a consistent number of technicians, professionals and building owners to understand the advantages of the MedZEB approach and to test it on real case studies.

 

The HAPPEN Platform is configured as a digital assisted marketplace aimed at favouring the match between demand and offer in the retrofit markets of the Med countries, at increasing the overall appeal and attractiveness of these markets, and  at re-creating and enhancing trust among owners and investors.

 

The Platform will also act as a digital advisor by offering to technicians and professionals dedicated support tool aimed at assisting them in the definition of customized feasibility studies for the deep retrofitting of residential buildings tailored for the owners’ needs, based on the application of the HAPPEN cost-optimal technical solutions integrated with the VEL financial solution.

 

Moreover, the access to e-learning resources (e.g. the ePills on energy retrofitting for households, and the “MedZEBinars”, which are training courses for professionals), dedicated discussion forums and high-level scientific material will contribute to the development of a strong community of practice where professionals may share their experiences and success stories.

 

The beta version of the HAPPEN platform is available at the following link: http://medzeb-happen.eu/

 

The HAPPEN project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 785072.

 

Endnotes:

1. _{HAPPEN - Holistic APproach and Platform for the deep renovation of the med residential built ENvironment; H2020 grant n. 785072; Call EE-11-2017; duration: 04/2018-03/2021; LP: ITC-CNR.}
2. _{M. Padula, F. Picenni, R. Malvezzi, L. Laghi, J.M. Salmeròn, F.J. Sanchez, C. Mateo-Cecilia, L. Soto-Francés, M.N. Assimakopoulos, T. Karlessi (2018): MedZEB: a new holistic approach for the deep energy retrofitting of residential buildings. TECHNE, special issue 1, pp. 127-133.}
3. _{BPIE (2018): The Concept of the Individual Building Renovation Roadmap}
4. _{R. Capogrosso, G. De Aloysio, L. Laghi, R. Malvezzi, E. Menconi, M. Padula, F. Pecchia, A. Cruceira, J. M. Salmeròn, P. L. Scala (2020): Deep energy retrofit of residential buildings in the Mediterranean area: the MedZEB approach. Proc. SSPCR 2019 (in press).}
5. _{Salmeron J.M., Álvarez S., Molina J.L., Sánchez F.J. (2013). Tightening the energy consumptions of buildings depending on their typology and on Climate Severity Indexes. Energy and buildings, 58, 372-377.}
6. _{Tax credit mechanism with 70% of reimbursement in 10 years}